2019: Worst of times, best of times for Indian finance

THE GOOD: NPA CYCLE TURNS

The bad loan recognition cycle at Indian banks finally turned the corner with both the systemwide gross bad loan ratio and the stressed asset ratio monitored by the Reserve Bank of India showing a declining trend.

Gross non-performing loan ratio was down at 9.1% at the end of FY19 against 11.2% a year ago. For listed entities, this ratio declined nearly 7.5% in the first half of this fiscal year, with absolute numbers at Rs 8.94 lakh crore at the end of September versus Rs 10.18 lakh crore during the same period last year.

“Three years since the asset quality review, the level of bad loans is beginning to ease; however, it has not yet relieved the banking system from the pressure over the recovery,” said Sanjay Agarwal, senior director, CARE Ratings. “The decline in the overall slippages is a sign of improvement in the banking system. In light of the June 7 circular of the RBI, banks would have to factor in the effect of the newly prescribed timelines for the restructuring and provisioning of their stressed assets.”

Indian banks have recognised around Rs 17 lakh crore of stressed loans as NPAs since FY16, led by accelerated NPA recognition following the central bank’s stringent norms and asset quality reviews.

Infrastructure-focused banks like ICICI and Axis changed their strategy towards a more granular lending while IndusInd Bank made efforts to kill the IL&FS ghost. For many state-run banks, the announcement of mergers was a bit of a drag, but data showed that their overall share in bad loans declined primarily due to recoveries and huge write-offs.

After the Supreme Court struck down the banking regulator’s February 12 circular on early recognition and resolution of stressed assets, a new framework was brought in which involved signing of intercreditor agreements (ICAs) to arrive upon a resolution. But, with ICAs worth Rs 3 lakh crore signed and resolutions few and far between, the last quarter of this fiscal year will be crucial.

Analysts forecast higher recoveries and slowdown in fresh bad loans may reduce banks’ non-performing loans to nearly 8% by March 2020.

“Asset quality of banks should witness a decisive turnaround this fiscal (FY20) with gross NPAs reducing by 350 basis points (bps) over two years to around 8% by March 2020. This will be driven by a combination of reduction in fresh accretions to NPAs as well as stepped up recoveries from existing NPA accounts,” Crisil said in a note.

THE BAD: IBC BACKLOG

When the Insolvency and Bankruptcy Code (IBC) became law, it promised a new loan recovery mechanism for banks in a defined time frame of 270 days from when a case had been admitted.

However, three years since the law has been in force, it has been marred by delays due to litigation, poor court infrastructure and, in some cases, companies taking their own time to pay up money.

Data from the Insolvency and Bankruptcy Board of India at the end of September shows that the 156 resolution plans completed took an average of 374 days, which is even higher than the revised 330 days granted by the Supreme Court in July 2019.

In November, while ruling on the muchawaited Essar Steel case, the Supreme Court struck down its own timeline of 330 days noting that the deadline can be extended in exceptional circumstances so as to get the best value to creditors.

“After the Supreme Court order, there is no timeline even for 330 days and we have already seen cases lingering for two years or more,” said RK Bansal, CEO of Edelweiss ARC, India’s largest bad debt aggregator.

The Essar case itself is a prime example of the delay plaguing the IBC, as it took close to 900 days for completion.

Even as banks rejoice over their ₹42,000-cr recovery in the Essar case, eight out of the 12 large cases forced to the IBC by RBI in 2017 are yet to find closure. Like Bhushan Power & Steel, which has been awarded to JSW Steel but is yet to be closed due to litigations amid allegations of irregularities in the company. Or take the case of Alok Industries, which was awarded to a Reliance Industries-JM Financial ARC joint venture in March 2019, is yet to close because banks are awaiting payment.

Delays are not only in resolution but also in admission of cases.

“The law provides for cases to be admitted within 15 days but, in reality, there are cases which are pending admission for months. Additional benches have been created but they are not fully functional. There is not enough infrastructure and not enough people to manage it. Now with personal guarantees also a part of the law, we expect delays to worsen as multiple guarantees will be linked to one corporate debtor. It will make things worse,” said KP Sreejith, managing partner, IndiaLaw LLP.

Fed up with the delays, bankers are now looking at alternatives outside the IBC, like in power projects where the issues are structural in nature, because once a company admitted is not resolved in the IBC, it has to be liquidated.

Bankers hope that this new law, which has so far given mixed results, does not go the way similar previous laws like debt recovery or SARFAESI went.

AND THE UGLY: NBFC CRISIS

The year gone by witnessed the full aftermath of the collapse of IL&FS, which froze the credit markets and the contagion spread. Non-banking finance companies were shut out of the market throwing investors into a tizzy and speculation over which would be the next domino to fall. The next to fall was mortgage lender Dewan Housing Finance Co with nearly a Rs 1 lakh crore balance sheet. The slide didn’t stop there with small-sized nonbank lender Altico Capital defaulting.

“Overall risk aversion remained high among the lenders as they perceived that liquidity issues can threaten solvency of leveraged corporates in stressed sectors and of many mid and small-sized non-bank lenders and housing finance companies that could potentially face an asset-side problem,” said Rajiv Mehta, lead analyst, Yes Securities. “Amid such cacophony, the investors have taken shelter in wellgoverned banks, NBFCs and HFCs having robust balance sheet.”

Since IL&FS collapse in September last year, without announcing any bailout or liquidity window for the struggling nonbank lenders, the government and the Reserve Bank of India announced several measures to arrest the collapse in the nonbank lending space that contributes over 20% of the total credit.

The regulator announced measures to increase liquidity in the system aiding banks to lend to NBFCs, and relaxed securitisation and priority sector norms. The government, on its part, announced a partial credit guarantee scheme which remains a non-starter till date. But these moves did not bring relief across the board, but selectively.

Then the government allowed an orderly wind-up or resolution of a failed institution. Since then, DHFL has been referred to bankruptcy.

“The trifecta of constrained funding access with rising borrowing costs, recalibration and de-risking of loan book and a slowing economy is set to beat down growth in assets under management of non-banks — comprising non-banking finance companies and housing finance companies — to a decadal low of 6-8% this fiscal, compared with ~15% last fiscal,” Crisil Ratings said.

A recent Motilal Oswal report has pointed out that only the top 25-50 NBFCs are able to manage the liability side pressure, while the remaining still struggle to raise funds. While banks have been disbursing loans to the sector, the mutual fund industry has shut their tap and the sector would likely take another year to be out of the woods.